Flood v. Synutra International, Inc.

Liang Zhang (defendant) controlled 63.5 percent of the stock of Synutra International, Inc. (Synutra) (defendant). In January 2016, Zhang proposed taking Synutra private by purchasing the stock he did not control at $5.91 per share. Zhang’s initial proposal did not condition the transaction on the approval of a special committee and the affirmative vote of a majority of Synutra’s minority stockholders. One week after Zhang’s proposal, Synutra’s board met and formed a special committee. One week after the board meeting, Zhang sent the special committee a letter indicating that he would not proceed with the transaction unless the transaction was approved by the special committee and by the holders of a majority of the voting stock that was not controlled by Zhang. When the special committee received Zhang’s letter, the committee had not yet engaged an investment bank or counsel. The committee subsequently hired independent financial and legal advisers but declined to enter price negotiations with Zhang until its banker could do due diligence. Price negotiations did not begin until seven months after Zhang’s letter. The special committee ultimately accepted a price of $6.05 per share, and a majority of Synutra’s minority shareholders approved the transaction. Shareholder Arthur Flood (plaintiff) sued in the Delaware Court of Chancery to challenge the transaction, asserting that the share price was not fair. Based on the Delaware Supreme Court’s holding in Kahn v. M&F Worldwide Corp. (MFW), the chancery court held that the business-judgment rule applied to the transaction because Zhang, as the controlling stockholder, had conditioned the transaction on approval by a special committee and by a majority of the minority stockholders. The chancery court dismissed Flood’s complaint, and Flood appealed, arguing that the business-judgment rule did not apply because Zhang’s initial proposal did not contain the special-committee and majority-of-the-minority approval conditions.